Egypt-Israel energy ties look broken

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Egypt and Israel’s energy ties have come unstuck. The Arab nation has terminated its long-term contract to supply gas to its neighbour in a payment dispute. In post-revolutionary Egypt, it was only a matter of time before the opaque gas deal fell apart.

The two sides have been quick to insist that the fallout is a business rather than a diplomatic dispute. Israel has supposedly held back payments, in retaliation for the slow restoration of supplies after repeated pipeline attacks. Prior to the uprising, Egyptian gas supplied 40 percent of Israel’s gas needs.

While the business dispute may be real, the timing suggests a political motivation that helps the ruling army shore up popular support ahead of an expected handover of power to a civilian government. There is barely a month until presidential elections and it was expected that the new government would review existing export deals.

A crony of the former president, Hussein Salem, is already accused of illegally profiting from the contract, originally signed in 2005 and renegotiated in 2009, which many Egyptians believe provides gas to Israel at below market prices.

The oddly-timed break in the fragile relationship suggests Egypt is unlikely to be willing to settle one aspect of the current dispute without a solution that addresses all of the concerns – including the conditions in which the original deal was set.

That suggests Egypt isn’t in any rush to resume exports to Israel, now, if at all. Total Israeli exports from Egypt to Israel amounted to $350 million in 2010 according to Barclays Capital. Egypt also currently imports some oil. If Egypt can switch to gas that would allow the country to partially reduce its energy subsidy bill which gobbles up 20 percent of its budget.

That leaves Israel increasingly reliant on expensive fuel oil, says Wood Mackenzie, amid already-frantic efforts to reduce energy consumption. Before the contract was terminated, the country was already bracing for summer blackouts. Pipeline attacks prevented gas from flowing for 225 days last year. Despite huge gas finds, Israel is unlikely to be self-sufficient for at least one year.

All the tip-toeing around the fall-out suggests that the spat is bad for peace, but doesn’t destroy it.